Kindle Economics

Kindle Economics

Summary: A few weeks ago I evaluated Amazon's Kindle. While I really liked the device, the big problem I had with it was that at its current price of $359.

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A few weeks ago I evaluated Amazon's Kindle. While I really liked the device, the big problem I had with it was that at its current price of $359.00 it was too expensive at this point for mass consumer adoption. I also had a number of issues with the fact that despite being based on Linux, the device is a closed book, literally.

At what point, however, do consumers start ditching their dead-tree books for e-books? And how many books do you actually have to read per year in order for the convenience factor of the Kindle -- its light weight, its ability to store hundreds of books in its memory, and the instant gratification of being able to download books via the Amazon Whispernet EVDO Sprint network -- to outweigh its costs?

Click on the "Read the rest of this entry" link below for more.

Others have attempted to take a swag at "Kindlenomics" before. But I decided to engage in a mental exercise (click for Excel Spreadsheet) in order to determine where the "sweet spot" in price might actually be for a large number of people to start using ebooks instead of buying dead-tree versions or going to the library.

See also: The Kindle Book Worksheet (Excel Spreadsheet)

Also Read: Amazon Kindle, It's not for us Jack

Also Read: Kindroid, two great tastes that would taste great together

Also Read: Can we finally realize Alan Kay's Dynabook for $100?

Chris Dawson over at ZDNet Education wrote a great post about what it would take to get Kindle-type devices or paperless educational curricula to replace textbooks and reading lists in elementary school and high school, and some of the problems that would have to be addressed.

Indeed, to get Kindles in the hand of 5th graders, we're going to have to think about battle hardening the devices (think a companies like Motorola Symbol Technologies or Panasonic's Toughbook division stepping in to help) and having them owned by the schools, because unless the prices of these things drop to the point where the replacement costs are roughly equivalent to what it currently costs to outfit kids with textbooks and literature for a wear and tear lifetime of 3 to 5 years, it's going to be a non-starter.

Kids are going to lose these things and destroy them. This of course, is assuming your kids don't go to a school district where textbooks are 30 years old because of budgetary issues.

Also Read: OLPC is dead... What Kindlenomics taught us

In my study, I decided to focus on two likely market segments -- higher education, and consumers. Right now, the Kindle is actually a realistic contender to replace textbooks in higher education because college and graduate degree textbooks are very expensive.  However, most college and graduate textbooks don't exist on the Kindle yet, so this exercise was purely a "What If".

We took a representative sampling of college and graduate-level textbooks that we could find on Amazon that had both Kindle as well as dead-tree versions, and came up with an average price of $73.04 per new textbook and  $49.19 for used.

It is my experience that college and graduate students will opt for used textbooks first, and then if a used version is not available, will buy new copies. The average Kindle textbook price was $39.04. With these numbers, we could extrapolate what students might spend per semester on books, based on a class load of 15 credits per semester and six textbooks purchased.

This came out to an average cost of $438.23 per semester if they bought the new books on Amazon (which is cheaper than what most universities charge for new books) or at $295.13 per semester used. However, a more realistic scenario would be a blended cost, with half new and half used, at $366.00 per semester.

If they had purchased all of the books on the Kindle, they would have spent $234.00, or a savings of $132.00 per semester. Over a period of 8 semesters, that's $1056.00, which if you subtract the cost of the Kindle at current prices, we're talking about a net savings of $700.86 over four years, which is not insignificant.

To put this another way, if college students had the ability to buy all their textbooks on Kindles, they could wipe out the cost of a Kindle with their savings over printed books in 3 semesters, or a year and a half.

To get a reality check on these numbers, we had a friend forward us their wife's 1st year of graduate school curricula for their Masters in Mental Health Counseling at a major New England university. As it turned out, he bought all of his wife's textbooks on Amazon -- which again, would have been cheaper than at a campus bookstore. The current Amazon price for all of those books came out to $692.17.

If we apply the same relative discount that we got from our textbook sampling, we come up with $429.00, or a net savings of $198.00 per year. This is not out of line with our projected numbers in our sampling -- and would also align with the Kindle's cost being wiped out in approximately 3 semesters.

I will note, however, we did not factor some students returning their texts at the end of the semester and getting a credit for approximately half the price they paid for them, in which case, that's going to to alter the model if you take that into consideration.

(Update: One of my readers decided to take the model a bit futher and did a Net Present Value analysis of Kindle ownership. You can read his blog entry and view his spreadsheet here.)

So clearly, it makes a lot of sense, even with the Kindle's current prices, to think about getting higher education on-board with electronic versions of textbooks. Within 2 or 3 years, when more and more electronic textbooks are available, a Kindle might be a nice High School graduation present.

Certainly, if you're an English Literature student now or read a lot of classics, a Kindle or another competing e-book reader is currently very viable, because the cost of your books are going to be very cheap on Amazon, or zero if you download stuff from Project Gutenberg.

So it certainly makes sense to get Kindles in higher education. But what about the average consumer? How many books do you need to read per year to make the convenience factor outweigh the costs?

So as with our textbook price sampling, we took a look at twelve New York Times best sellers, and totaled up the prices, assuming mostly hardcover with some paperbacks -- this came to $168.15 if we bought them on Amazon. The Kindle cost would have been $109.11.

In other words, if you read one book per month, and you subtract the cost of the Kindle, your net savings per year is approximately $59.04. To wipe out the cost of the Kindle completely, you have to buy and read six books per month to wipe out the Kindle's cost over the course of one year. That's a pretty voracious reading schedule -- and if you're reading that many books, you're probably spending most of your time in a library and not purchasing them on Amazon.

So it would seem that unless the convenience factor of the Kindle currently outweighs its costs, the Kindle is not a huge value proposition for your average consumer today. But if its cost were to drop approximately in half, say, between the 3 and 4 book per month level at around $200 per unit, then we might start seeing greater e-book adoption by a larger segment of the population. At the two books per month level, it's going to need to cost around $125.00 or $150.00 or so.

Have you done your own "Kindlenomics" studies? Talk Back and Let Me Know.

Topics: Microsoft, Amazon, Collaboration, Hardware, Mobility, Software

About

Jason Perlow, Sr. Technology Editor at ZDNet, is a technologist with over two decades of experience integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer.

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Talkback

102 comments
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  • Mainstream

    I own a kindle and I love it. However, at it's current price point it is only appropriate for a) people who read tons of books and can justify the purchase (I know of very few people who read so avidly) or b) people with a lot of disposable income such that the convenience is the only real consideration, or maybe c) people who actually read newspapers and magazines and just hate the thought of the piles of paper generated by such items.

    IMHO it won't hit mainstream until at least $200 is knocked off that price. Until then it'll just be a high tech toy for people with lots of disposable income.

    P.S. I guess it goes without saying that their magazine, newspaper and older book offering have a ways to go before it'll be a true "book replacement".
    oncall
  • Non-starter

    First, you assume that textbooks are disposable: that once the class is over the student throws them away.

    Maybe in some fields, but I not only have my texts from more than thirty years ago but my sons have borrowed them for their University studies. Fermi's [i]Thermodynamics[/i] is still quite instructive today, after all. So are Feynman's [i]Lectures[/i].

    Even the current dead-tree versions are useful for several years for review and so on, so the DRM-timebombed "electronic texts" are useless unless you look at that average cost as being a recurring rental, and in that case the economics becomes impossible to justify.

    Which brings up the DRM: if the texts in question [i]aren't[/i] DRMed to uselessness, the Kindle is superfluous because the student can read them on a laptop, netbook, etc. and using a general-purpose computer has the added benefit of being capable of cut-and-paste between the text and the student's own work.

    What this gets back to is that the only justification for the Kindle's existence is as a locked-down vehicle for DRM, and DRM in turn only exists to remove value from purchased works. All in all, this is just [b]not[/b] a sustainable business, and when it fails (as we've seen with the Yahoo music store, Wal-Mart, etc.) purchasers are left with dead bits.

    The Kindle would be a somewhat frivolous waste of a few hundred dollars, but losing the rented works bought for it (either to time-bombing or business failure) is another matter. [b]Especially[/b] for textbooks.
    Yagotta B. Kidding
    • Why would they have to throw them away?

      I don't understand why you think this assumes students throw away their textbooks. They either trade them in for buyback at the end of the year for about half of what they paid for them (which we did not factor into this exercise) or they keep them. I don't see how buying an electronic version that the student had an infinite entitlement to (keyed to Amazon account number, or stored within a University database that was online accessible, so they could read them years later on another device) would constitute "throwing it away".
      jperlow
      • Keepers

        Assuming Amazon does not go under and take kindle with it, why would your book collection be at any risk? I think this unlikely, once the price comes down this is basically a can't lose business because of the extremely low overhead. Like Apples iTunes and apple TV, you think Apple is risking any real money storing movies on their hard drives? Nope. Unlike blockbuster or a major store, Apple doesn't lose a bunch of money if those movies don't sell or rent. Same for kindle, once they have an established user base this thing is going to feed itself. Just upload new books to the server, slap a price on it, and sit back and collect the money. Amazon is not going to go broke storing digital media and accounts on their servers where traditional bookstores could easily go broke storing unpurchased books.

        I commuted to college, my back still remembers the heavy books I had to take on the public transit system, and lugging them through several moves over the years before I finally tossed them. If they can replace college books and bring the price per unit down it's gonna fly.
        oncall
        • Right

          because all the electricity, sysadmins, hardware replacements, etc. Apple has to use to make iTunes work comes from pixie dust.
          frgough
        • Why your book collection is at risk...

          You're joking, right? What technology items did you buy 30 years ago... and are still using?

          As an electronic device, this has a useful life of only a couple of years. Accidents happen, electronics die, bugs crop up in software...

          And with DRM, it's your loss when (not if) it eventually dies. Plus, most companies won't support their products past a handful of years.

          Think of it this way... I bought some games for my Atari computer back in high school. How would I play them now with... the original company out of business, decayed magnetic bits on the disk, unavailability of drives to read it, and unknown data formats and code even if I could retrieve the bits off disk.

          Paper is still the only viable long-term media.
          dominigan
          • Why it's less at risk than you thought...

            ...so long as you avoid DRM.

            http://tinyurl.com/5lk86f
            dave.leigh@...
      • "Reads for Sure"

        [i]I don't understand why you think this assumes students throw away their textbooks.[/i]

        I don't -- I pointed out that your analysis [u]does[/u].

        [i]They either trade them in for buyback at the end of the year for about half of what they paid for them (which we did not factor into this exercise) or they keep them.[/i]

        So what is the trade-in value of an electronic text?

        Oh, that's right -- you can't. You also can't share them with classmates, family, etc.

        [i]I don't see how buying an electronic version that the student had an infinite entitlement to (keyed to Amazon account number, or stored within a University database that was online accessible, so they could read them years later on another device) would constitute "throwing it away". [/i]

        Remind me how the "Plays for Sure" program is working. How about the Yahoo music store? Wal-Mart's digital downloads?

        My experience with "electronic textbooks" is that they're time-bombed to expire at the end of the academic year. That's one reason that they're less expensive than the printed ones; those who want to keep copies for later use have to pay rent.
        Yagotta B. Kidding
        • Here today, Gone tomorrow

          [b][i]Remind me how the "Plays for Sure" program is working. How about the Yahoo music store? Wal-Mart's digital downloads?[/i][/b]

          Precisely. I've "bought" books on-line (programming references). Where are they now? The question's not rhetorical, as I haven't seen them in years... not since the company went out of business.

          So now it's Creative Commons text by preference. Open formats if I can't get that. Otherwise I will unashamedly and unabashedly work around whatever restrictions are in place to protect my investment. For instance, I recently purchased a title from YUDU.com. The very first thing I did was convert the book from their online-only format to the PDF they should have offered to begin with.

          Am I going to buy from them again? Quite probably, if they have content that I want. Their format was easy enough to convert in a few minutes. Would I BUY a PDF copy if they offered it? Yes, even though I've made my own, and even though I've already "bought" the online content. Are they damaged in any way by my archived copy? Not in any conceivable way, no. Will I share that copy? No, buy your own...that's why they're not damaged. But when YUDU.com buckles under -- despite my financial support -- I will not lose MY investment. So saith the voice of experience.
          dave.leigh@...
      • Book Buy Back

        The problen with book buy backs is that the schools only keep the books for a term or two. I have been burned by this so many times, about half my books were unable to be sold back to the school book store, I have a nice stack sitting in my attic.
        rkinne01
  • RE: Kindle Economics

    Does anybody besides me think this will open up a whole new realm for book publishing? What I mean is these devices basically remove the overhead typically associated with book publishing, i.e. now that the financial "risks" associated with getting a typical book to the end user such as printing, distribution, marketing, and *gulp* returns is now practically zero. Writers could ultimately see not just an easier time getting the book to market but also an increased profitable lifespan of their works as now there is no carrying costs keeping a digital book on a virtual shelf.
    oncall
    • I agree with you ...

      ... that the potential is staggering. Not only must book publishers invest hundreds of thousands of dollars in a new author just to get a book out the door, they have to store all those books in warehouses that must be lit and heated (or cooled) year round. They must be shipped as well.

      The costs incurred by a publisher to ship an e-book from a new author is literally pennies.
      M Wagner
  • The rest of the story

    I note you didn't address the point that the Kindle is redundant to computers that students have to have anyway, assuming that the "texts" in question aren't DRM-locked to particular devices (which is the current state of affairs.)
    Yagotta B. Kidding
    • I see you are very against DRM

      I assume your biggest problem with Kindle is DRM. Fair enough. How would you go about guaranteeing the publishers, of lets say classroom texts, fair reimbursement for their efforts in a non-DRM world? The problem I see is that, let's take music, digital music players are now ubiquitous, the number of people who will honestly pony up $.99 for a song VASTLY outweigh the relatively few who would pirate such music. Song producers can throw out such DRM free music and still make a killing because most people will just buy them without giving the $.99 a second thought.

      Whereas in a small classroom of 30 students, and texts being expensive as they are due to their small market, such a DRM free texts could be instantly distributed to the entire class. Thus from a book publishers standpoint it would be far better to stick with good old fashioned paper, so they know they have x-numbers of classes using the book and can expect to sell x-number of copies over the books useful life span, than risk DRM free digital piracy.
      oncall
      • Site License

        I wonder if they will take the journal approach and switch to campus licensing of texts - if nothing else it would put a stop to the 'new edition to kill used book sales' that plagues Calculus texts in particular.
        wraynop
        • interesting idea

          Neat idea, but that just transfers the expense back to the school, and as such they may be inclined to cut corners and use cheaper, out-of-date texts. It would probably significantly narrow teachers choices only to the cheapo "pre-approved" texts :(
          oncall
          • It would bring the price of education down,

            If only because now, instead of a horde of individual students with very little bargaining power, the schools could negotiate fairer prices. Used books would no longer be available, but also no longer would the publishers push out a new revision with minor differences just to make the used books obsolete. Revisions could be more or less continuous.

            Frankly, I see textbooks moving more toward a wiki-style publishing system in the not too distant future. Professors would subscribe, perform updates, peer review lessons and problem sets, and check out a specific revision to plan lessons around. Its all public knowledge anyway; The containerization of that knowledge (organizing and publishing a book) just makes it easier for the instructors.
            drenfro
      • Academic publishing

        [i]How would you go about guaranteeing the publishers, of lets say classroom texts, fair reimbursement for their efforts in a non-DRM world?[/i]

        Not my problem any more than it's my problem to ensure that the people who sell me gasoline make a profit. I just point out that the business arrangement that they are suggesting is not an attractive value proposition.

        Now, as far as academic publishing goes I do have a few minor observations. Such as, there isn't anything magically wonderful about the latest edition of a text on college algebra. Comparing my father's from 1947 to my daughter's from five years ago, the old one would have done just as well.

        So how come the new one cost almost $80? Did the publisher have to revise the text every year to cover advances in the field? No? Hmmmm. Why is it that the same book that costs $150 in the USA costs less than $30 (same publisher) in India, even after being shipped across the Pacific?

        No, I think the publishers' profits are being very well cared for without my help. If they can't make any money in the business, quite a few professors (who typically receive very little from book sales) have taken to producing texts under Creative Commons licenses. I'm sure that the world will not end.
        Yagotta B. Kidding
        • Looking out for oneself

          God forbid a company look out for their own profits, that's just so un-American ;)

          I find the Anti-DRM arguments really similar to the anti-Apple and anti-Microsoft arguments. The whole, I only want to buy a product under my terms and at my price, etc.

          There's always the library.
          oncall
          • Anti-DRM

            It has nothing to do with profits or anti-company sentiments. People hate DRM because you never actually [i]own[/i] a DRM-encumbered product. At the company's whim (or collapse), it can make your product disappear: http://www.cdfreaks.com/news/15195-Top-5-music-DRM-disasters-of-all-time.html.
            spamagnet